"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

"borning of austerity" - well he is American, they do spell their words and grammar goofy lookin over there.

I'd agree with Marc Fabers point on impact of zero interest rates, but at the same time I'd argue that the point in Bill Gross's article isn't at all invalidated by it, in fact the two probably go together. Speculation is generally a short term focused activity, requiring short term financing. The liquidity provided by the Central Banks as per Marc's comments, and the compression of the duration noted in Bill's article, both result in pulling funding away from the LT horizons and invested into the ST, to take advantage of the higher volatility... commodities, futures, etc all liquid products, all tradeable, all speculative (arguably) is all where the action is.... however true LT investing, and true wealth creation, new plant, new machinery, new buildings, all generally illiquid, LT investment horizon products are all distinctly unattractive in such markets?

So US jobs went up last week ? No, they just didn't fall as much as expected. This news got a lot of positive press last week!!

QUOTE

To begin, it's useful to understand how the Bureau of Labor Statistics calculated the 243,000 increase in employment that it reported for January. Total non-farm employment in the U.S., before seasonal adjustments, fell by 2,689,000 jobs in January. However, because it's typical for the economy to lose a large number of jobs after the holidays, largely in retail trade, construction, and manufacturing, the BLS estimated that the "normal" seasonal decline in employment should have been 2,932,000 jobs in January. The difference between the two numbers, of course, was 243,000 jobs, which was reported as an increase in employment. The fact that the size of the seasonal adjustment was more than 12 times the number of reported jobs, and more than 30 times the "beat" in economists' expectations, should provoke at least some hesitation in taking the number at face value.

indeed, Mr Gross's description is a fair diagnosis. But Zero-bound interest rates are really negative rates, in the current environment.

Marc Faber, in his latest Doom Gloom Boom report makes the point, (also described as the RISK ON play), when talking about the current environment of QE and other measures taken to avoid (postpone) calamitous collapse

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Money printing in the US may not necessarily and immediately lead to sharply rising consumer prices in the US itself but the symptoms of monetary inflation can occur outside the US. e.g. rising wages in China and soaring property prices in resource producing regions. Similarly, money printing by the US Federal Reserve and the ECB (see below) has led to depreciation in the purchasing power of these regions' currencies compared to the currencies of boom countries such as Australia and Canada.

...the symptoms of monetary inflation will show up somewhere: either in wages or in corporate profits (as was the case recently) or in consumer, commodity, art, real estate, stock and bond prices - or in the appreciation of currencies. But somewhere monetary inflation will manifest itself.

Moreover, the viciousness of monetary inflation is that its symptoms will not show up evenly and simultaneously but they will shift from one sector or region to another and lead to extreme economic and financial volatility.

This is particularly true in an environment of negative real interest rates, which punish over time cash holders and therefore, increases the propensity to speculate..

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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

I read a very interesting article by PIMCO's Bill Gross over the weekend, but an unfortunate run in with a Norovirus has left me too laid up to consider responding, and coming into work today I've found the article still up on my screen (yes - being a timid bank worker fearful of a job cut I was in at work on Sat trying to curry good favour with the powers that be.... or maybe I was just catching up from work I should have done instead of skiving off to read SS?)

zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis.

Essentially as best as I can paraphrase his argument, when short term interest rates are very low, say 0.25% and the rest of the yield curve is particularily flat, eg US10Yrs at 2% (thanks to operation "Twist") and intersting problem develops. Basically rational investors will chose to simply park their money and prefer to earn ST interest at 0.25% and be guarranteed to get their money back, than risk investing in the LT, with at best the possibility of a couple more points of upside, all the while being exposed to massive amounts of downside duration risk, if interest rates merely move from 2% back to a more normal level for 10yrs of around 3.5 - 5%. Consequently the effect of zero interest rates is to suck forward investment funds, in terms of where people choose to place they funds, ie what would have otherwise been invested LT into the ST.

Why is this a problem? Banks are basically the transmission mechanism from the monetary policies of the central banks into the real economy, so just as investors become reluctant to invest in LT govt bonds, they suddenly become much more reluctant to invest in LT bank bonds (while text books classically defined banks as serving an intermidiatary role, of borrowing short and lending long, the outcome of the GFC has revealed the reality much more complex, banks have a combination of borrowing horizons, ranging from overnight, out to a 5 or 7 year bond, and heaven help any bank too reliant upon ST funding).

Basically the implication of Bill's viewpoint is that zero bound interest rates, are unlikely to cure credit crisis, infact they may accentuate the problem by making the risk reward pay off for investors choosing to invest LT less desireable, and then transmit that through to the banks, who are unable to source LT funding (or pay a much higher price for it) and then ultimately restrict LT credit to the wider economy, despite the appearance of massive amounts of liquidity being pumped into the system by central banks.... explaining the cunundrum of why all the central bank funds ultimately get parked back at the central bank earning 0.25% instead of being onlent into the wider economy.

Anyhow, the more interesting part of Bill's article is attached below:

QUOTE

When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the US and selected “clean dirty shirt” sovereigns, then the dynamics may change. Money can become less liquid and frozen by “price” in addition to the classic liquidity trap explained by “risk.”

Even if nodding in agreement, an observer might immediately comment that today’s yield curve is anything butflat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit.

Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behaviour, including that of the US Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.

Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.

That mookie opens up a whole new can of worms, since the question often asked is : Does the US have the gold that is widely thought they own?Reason the question remains unanswered is because no official audit of Fort Knox has been held for decades.Why no audit?Why does not the US publish any M3 (money supply stats)?

Answer those questions and just maybe the actual financial position of the US possibly becomes a whole lot worse.

Value of US gold reserves is somewhere around 400 billion or about 3% of their current debt. Thats the official one, the contingent one at well over 40 trillion its about 1%. I have looked at these and other suggestions from asset sell offs to some secrety hoard or foreign reserves and even usuail all of the above which would mean the US ceased to operate without reserves ... they account for about 1.6 trillion vs an official debt 10 times this. Another 2 or so trillion if they sold the house ... still leaves it well short.

Bottom line and if you can find it ... the US needs to slash spending by around 40%, raise their federal tax take by about 50% ... neither of which is going to happen anytime soon. As such I suspect the offical debt number is 200% of GDP by 2020 and rises to 300% by 2025 and 400% by 2030 if its allowed. Numbers are well contained in the US congressional budget office projections the ones that use a realistic growth rate and inflation rate. Other studies usuing a zero or near zero inflation scenario still come up with the same outcome all be it by 2050.

Cheers

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All views expressed are my own opinions. While I take every care when posting no guarantee to the absolute veracity of the postings is given or implied. Please do your own reseach and consult a professional investment advisor before investing.